Public entities at the Federal, state, and local levels set aside contracting opportunities, provide preferential price treatment, or otherwise grant favorable treatment to contractors (1) owned by veterans, women, minorities, or Alaska Native Corporations; (2) in historically underutilized geographic areas; or (3) that are certified small businesses. A guilty verdict in a closely-watched case involving a Canadian construction company that obtained hundreds of millions of dollars of work on the World Trade Center highlights the importance of strict compliance with the rules of set-asides in public contracting, the significant consequences for misrepresenting a corporation’s eligibility for preferential treatment, and the interest of criminal prosecutors—not just contracting officials—in matters of contract performance.

The Port Authority of New York and New Jersey awarded DCM Erectors two large trade contracts for work related to the reconstruction of the World Trade Center site, including drafting and engineering, surveying, structural steel supply and erection, and installation of metal decking. The first contract, awarded in 2007, was for work to be performed on One World Trade Center (the “Freedom Tower”) and worth $256 million. The second, awarded in 2009, was related to the site’s Transit Hub and worth $330 million. With changes, the final value of the contracts neared $1 billion. The contracts were subject to the Port Authority’s minority- and women-owned business program, by which prime contractors on construction projects must make good-faith efforts to achieve 17 percent participation by minority- and women-owned business.

Federal prosecutors contended that DCM and its CEO, Larry Davis, established a scheme by which DCM falsely attributed work to several minority- and women-owned subcontractors actually performed by DCM, in violation of the Port Authority’s regulations and the contracts. To further the scheme, DCM, Davis, and the subcontractors allegedly created false purchase orders, payroll records, and other documents to make it appear that DCM’s subcontractors had been performing work they had not performed.

In 2013, a Federal grand-jury indicted DCM and Davis on Federal wire- and mail-fraud counts. After years of proceedings and a seven-day trial in Manhattan, during which Davis denied believing he had broken the law and which featured testimony against DCM and Davis by management of the subcontractors, a jury needed just three hours to deliberate before returning guilty verdicts. Sentencing is in November.

Socio-economic programs are commonplace in public procurement, and particularly so in public construction projects. They are a powerful tool for qualifying businesses to compete for, and win, work that might otherwise be difficult for small businesses or other entities with socio-economic challenges or a small portfolio of completed jobs. But they are complex and require deep understanding and a robust compliance system. Contractors should have an internal-control system that tracks work performed by disadvantaged-business partners and that retains sufficient documentation to respond to an audit or regulatory scrutiny. Contractors should also know that failure to comply—or failure to ferret out non-compliance within the organization—can have significant civil, administrative, and as the DCM case shows, criminal consequences.